The New U.S.-Cuba Relationship: A Pause to Consider How Cuba Might View the Changes

Kegler Brown Global Business NewsJanuary 21, 2015by Luis M. Alcalde

During the
past few weeks much has been written in regard to the changes made by the U.S.
in its Cuba policy. The changes in policy announced by the President on
December 17, 2014 and recently reflected in the amended regulations issued by
The Office of Foreign Assets Control (OFAC) and the Department of Commerce's
Bureau of Industry and Security (BIS) have raised expectations of greatly
improved bilateral relations and increased trade with Cuba. Undoubtedly these
changes in U.S. policy are important and welcomed by Cuba and everyone who
wants normal diplomatic and commercial relations between the U.S. and Cuba.
Nevertheless, now may be a good time to review and reflect on some of the
complex issues for bilateral trade and better relations raised by these changes
in U.S. policy.

In analyzing
the changes in U.S. policy and its possible impact on U.S. - Cuba relations and
commerce we must remember that in any cross-border transaction U.S. policy
represents only half the equation. As a
sovereign nation Cuba controls the entry of people, goods and services into its
territory. To Americans the policy changes announced by the President may seem
like a new course and an attempt to build a new relationship. However, Cuba may
not see U.S. policy quite the same way. In fact, reading the early commentaries
in the Cuban press it is clear that some commentators in Cuba view the change
in U.S. policy as one of tactics but not a change in the goal to bring about
regime change. We can refer to the language in the amended BIS rule to see how Cuban
commentators might come to that conclusion:

"This rule amends the Export Administration Regulations to
create License Exception Support for the Cuban People (SCP) to authorize the
export and reexport of certain items to Cuba that are intended to improve the
living conditions of the Cuban people; support independent economic activity
and strengthen civil society in Cuba; and improve the free flow of information
to, from and among the Cuban people… These actions are among those announced by
the President on December 17, 2014, aimed at supporting the ability of the
Cuban people to gain greater control
over their own lives and determine their country's future"

Regardless
of one's view on the matter, it is clear that the above text presupposes that
the Cuban people have no control over their lives and cannot determine their
future. The White House fact sheet issued in conjunction with the
President's announcement made clear that the old policy of isolation had failed
to accomplish U.S. objectives for changes in Cuba and a new policy was needed: "We cannot keep doing the same thing
and expect a different result."

Hence, the
White House fact sheet stated:

"Today, the President
announced additional measures to end our outdated approach, and to promote more
effectively change in Cuba that is consistent with U.S. support for the Cuban
people and in line with U.S. national security interests."

It is
important to keep in mind that Cuba has a very different economic and legal
model than the U.S. As both nations seek to increase their bilateral
interactions it is worth remembering that the process is not necessarily made
easier if one party enters the negotiations with the stated purpose of changing
and undermining the other party's political, economic and legal system.

As we look
closer at the changes in U.S. policy it is evident that some policies will be
easier for the Cubans to accept and work with than others. The expanded general
licenses to travel to Cuba, and the ability to use credit and debit cards will
make it much easier for Americans to qualify under U.S. law to travel to Cuba.
Generally, Cuba welcomes American travel to Cuba. However, Americans need to
keep in mind that they will still need to obtain visas from Cuba to travel to
Cuba. The Cuban visas required may be tourist visas or business visas depending
on the reasons for visiting Cuba. The time frame to obtain a Cuban visa will
vary depending on the type of visa requested and the purpose for the
visit.

The new U.S.
policy of allowing exports of construction and building materials, equipment
and tools to the private sector is an example of a more complicated matter.
Undoubtedly Cuba welcomes the relaxation in export barriers but this U.S.
export relaxation is aimed at a very small segment of the Cuban economy. At a
time when 85 percent of the Cuban economy is in the hands of the state and Cuba
seeks foreign investments in energy, transportation, biomedical fields and
infrastructure, the U.S. is going to allow exports directed at small
restaurants, barbershops and beauty salons.

These small
private businesses will have little impact on the overall economy. Favoring
this small sector of the economy at the expense of the rest of the Cuban
economy may be perceived in Cuba as raising the risk of economic and social
distortions when most Cubans remain employed by the state.

Undoubtedly
this appears to be an aim of the U.S. policy. Given that the U.S. continues to
prohibit free trade with Cuba it will be interesting to see how Cuba responds.
Moreover, it is not clear how exports directed solely at small private
entrepreneurs would legally enter Cuba. In Cuba, authorized state owned
companies import goods into Cuba. Imports designated by the U.S. for small
Cuban entrepreneurs will need to be authorized by Cuba.

The new
regulations do provide openings for American businesses that could be of
interest to the Cuban state sector. Agricultural, telecommunications and other
sales to the Cuban state sector should be eased somewhat by the new definition
of "cash in advance," which now permits cash payment "before
transfer of title to, and control of, the exported item to the Cuban purchaser."

Likewise,
permitting financing of the Cuban purchase by a banking institution located in
a third country and allowing U.S. banks to confirm or advise on the financing
should open up financing options. In the past, the strict U.S. payment rules
requiring cash payment before the U.S. goods arrived at Cuban ports have made
it very difficult for Cuba to purchase from the U.S. even when U.S. products
were otherwise a better deal. We shall see how Cuba reacts to these new payment
options and whether it will lead to an increase in U.S. exports in these
categories to Cuba.

Another new
opportunity for U.S. businesses may be in the environmental and energy fields.
Cuba generates 97 percent of its electrical energy by burning fossil fuels.
Cuba has a stated goal of generating 24 percent of its power needs from
renewable energy by 2030. Newly amended § 15 CFR 746.2 (6) provides the following with
respect to exports to Cuba:

"Application for exports or reexports of items necessary for
the environmental protection of the U.S. and international air quality, waters,
or coastlines (including related to renewable energy or energy efficiency) will
generally be approved."

As set forth in the CFR, "this rule amends the licensing
policy for Cuba . . . to add a general policy of approval for exports and
reexports of items necessary for the environmental protection of the U.S. and
international air quality, waters, and coastlines (including items related to
renewable energy or energy efficiency) . . . this revision notifies the public
of the U.S. interest in considering applications for such authorizations."
See Federal Register Vol. 80, No. 11,
January 16, 2015, pg. 2288.

The new U.S. policy towards Cuba certainly has much merit. At the
very least the new policy grants Americans greater freedom to travel, and the
U.S. and Cuba are engaged in talks to re-establish diplomatic relations.
Whether the new regulations lead to any significant increase in commerce
depends greatly on Cuba and further U.S. efforts to fully normalize relations
with Cuba.